Let’s start this from a simple, straightforward position: You can’t get away with tax evasion or tax fraud. You have to file. And if you owe the IRS money, you have to pay. Trying to outsmart or sneak around the federal government is not a good idea.
Lots of Americans have debt, for example, but the IRS is not your typical creditor. And while there may be ways to work around other kinds of debt, owing the IRS can take things to a whole ‘nother level.
There are some pretty severe consequences if you don’t pay your taxes. Here are seven.
The first thing the IRS will do if you don’t file or have outstanding debt with the government is send letters. If you ignore the notices, the IRS will hire a private collection agency because it’s required by law to do so.
The collection agency will reach out by letter. Then the phone calls will start. Ideally, this kicks some kind of resolution into gear. The collection agency won’t threaten you, and there are laws designed to protect taxpayers, but if things get bad enough, a revenue officer may come knocking to collect.
Debt won’t stop
Debt you owe the IRS doesn’t go away because you stop paying attention to it. In fact, it gets significantly worse.
Interest on what’s owed but not paid starts right away at 7%, even if you file on time, and it’s compounded daily. Then there’s the failure-to-pay penalty, which is half of 1% for each month, or partial month, and maxes out at 25%.
But wait, it gets worse! If you owe the government money and you don’t file on time, there’s the failure-to-file penalty. That penalty is typically 5% of what you owe for each month or partial month that you’re late. It caps out at 25%. And if your return is more than 60 days late, there’s a minimum penalty of either $450 or 100% of what you owe in taxes, whichever is less.
Garnishing your wages
If you aren’t paying your taxes and you’re drawing an income, you can bet your bottom dollar the IRS will come looking for it. The federal government can seize your wages through levies, and the IRS decides how much of your paycheck to take.
So some of your paycheck will go directly to the IRS until you make some arrangement to pay what you owe, pay it in full, or the IRS releases the levy. And any bonus you make is not exempt: the entire bonus would go to the IRS.
Revoking your passport
If you enjoy travel, you better make sure you pay your taxes. If you don’t, the IRS will notify the State Department that you have unpaid debt to the government and you can say “adios” to your passport.
If you don’t have a valid passport, the State Department won’t issue you one after getting a heads up from the IRS. For Americans overseas, the State Department will authorize a limited passport that gets you back on U.S. soil to deal with your tax situation.
Say goodbye to your refund
Getting a refund isn’t actually a good thing, since it means you’ve been providing the federal government with an interest-free loan for the last year, but if you’re due one and you don’t file your taxes, you won’t get it.
There’s a three-year window, from the original due date, for people to claim their refund. You probably won’t get hit with a penalty for failing to file if the IRS owes you money and you weren’t required to file, for example, if your taxable income was too low, but you are throwing the refund away.
Tax liens are a severe escalation from the IRS. If you’re in debt to Uncle Sam for $10,000 or more, a lien can be established — which is the government’s legal claim to your stuff if you don’t pay the taxes you owe. It includes property (real estate and personal property) as well as financial assets. A federal lien can also trigger state and county liens.
To make matters worse, liens may be made public. Creditors will know the government has a right to your property. That makes it a whole lot harder to get a loan, job, or even a place to live. Once you pony up everything you owe, the IRS is only obligated to clear your lien within 30 days of full payment. And that could feel like a very long month.
You could face jail time
The IRS has a tax-crimes handbook (available online) that’s the length of a small novel. By far the scariest consequence, and most extreme, is being tossed in jail for not paying your taxes. It is not, however, the typical outcome for most people.
“Crime” is the operative word here. The IRS isn’t going to imprison someone who’s simply having a hard time paying their taxes. But if you’re actively evading taxes or trying to defraud the government, federal charges can be brought against you.
Don’t attempt to get cute or try to outsmart the IRS. It is a losing proposition. The federal government goes after people who owe taxes. And it will be a miserable experience for them.
Bear in mind that tax evasion and tax fraud are not the same as tax avoidance, which is totally legal, and can save you a bundle through deductions, credits, and income adjustments to lower the amount you owe.
At the very least, you won’t get your tax refund if you don’t file, even if you are otherwise not required to file. And you should at least claim what the government owes you.
The deadline to file your tax return is April 15.